In the past five years, Iran’s regional power has expanded considerably. Benefiting from Bush Administration policies — especially the toppling of Saddam Hussein — as well as record oil prices, Iran has deepened its relationships with militant factions in Iraq, Lebanon and Palestine. It has also accelerated a nuclear program that could give it the ability to make atomic weapons within the next few years.

At the same time, President Bush, Secretary of Defense Robert Gates and other U.S. administration officials have repeatedly labeled Iran a major, if not the major, threat to U.S. interests and U.S. allies in the Middle East.

Irrespective of all these dynamics, Iran’s reach remains constrained by an open-ended U.S. military presence in the region, domestic weakness and historic divisions between Arabs and Persians, Sunnis and Shiites — and among Shiites.

Though happy to take advantage of power vacuums, Iran neither wants nor is able to recreate the Persian Empire, nor is it about to become a second Soviet Union. As Mohammad Atrianfar, a veteran publisher of Iranian reformist newspapers, told me in a March 2008 interview in Tehran, “We are not going to stretch our legs beyond the capacity of our carpets.”

Iran’s goals appear to be largely defensive — to achieve strategic depth and safeguard its system against foreign intervention, to have a major say in regional decisions and to prevent or minimize actions that might run counter to Iranian interests. In the service of those interests, Iran has been willing to sacrifice many non-Iranian lives.

Despite record oil revenues, the government of President Ahmadinejad has failed to meet electoral promises to improve the lot of the average Iranian. Handouts to the poor have been devalued by inflation, running at over 20%.

The Iranian government has also had trouble reducing unemployment. Ahmadinejad’s strident pronouncements on Israel and the Holocaust and his aggressive defense of Iran’s nuclear program have frightened away both Iranian and foreign investment — investment needed to increase the oil and gas production on which Iran’s export earnings depend.

Even within the ruling conservative elite, internal politics are churning, and Ahmadinejad is likely to face stiff opposition from a new parliament and several rivals for the presidency in 2009.

In this environment, Iranian leaders must tread carefully. Iran’s provision of millions of dollars to Lebanese Shiites and Sunni Palestinians and soft loans to Iraq arouse resentment from ordinary Iranians struggling to make ends meet.

Despite Ahmadinejad’s defense of Arab causes and the religious links among Shiites, there is little affinity between the average Iranian and the average Arab. Given the opportunity to travel regionally, most Iranians go to Dubai, home to a large expatriate Iranian community — rather than Beirut, while Lebanese Shiites prefer Paris to Tehran.

Iranian religious pilgrims visit Najaf and Karbala, but Iranian identification with Iraqis is minimal. This is a consequence of the 1980-88 war, which Iraq started and which killed more than a quarter-million Iranians, as well as of grievances that go back centuries.

I well recall being told by an Iranian, as violence mounted in Iraq in 2006, “What do you expect? They killed our Imam Hossein.” The reference was to the most emotional event in the history of Shiism — the murder of the Prophet Muhammad’s grandson on the plains of Karbala in 680, by the army of the Sunni caliph, Yazid.

Iranians, with a long historical memory, also see their pre-Islamic culture as superior to that of the Arabs. They bemoan the seventh-century battle of Qadisiyeh, when the Arabs defeated the Persian Empire and converted Persians to Islam by the sword. These cultural divisions form a solid barrier to the spread of Iranian hegemony.

So does the U.S. military — which, despite being stretched thin by repeated deployments — is not about to quit the Middle East.

U.S. Arab allies along the Persian Gulf, as well as the Maliki government in Iraq, are busily signing new defense agreements with the United States, France and NATO to convey the message to Tehran that there is a limit to what Iran can do even in its own backyard.

Many Iranians understand their country’s limitations. “The United States is a superpower, and that is accepted by Iran,” said Atrianfar. “The United States has 30% of the power in the world and 50% of the knowledge.”

“Iran has 3% of the power in the world and 5% of the knowledge, and this should be accepted [by the United States]. As soon as this level of power is accepted, we won’t demand more. If you don’t accept it, however, we will find another way and put pressure on you through the neighbors. If you block a creek, the water will eventually overflow.”

In asserting what it sees as its rightful influence, Iran is contributing to — and benefiting from — a trend toward disintegration intensified by the U.S. invasion of Iraq. “The whole region is breaking apart, and the most obvious feature is the emergence of nonstate actors,” said British author David Hirst. “These nonstate actors are a law unto themselves and don’t respond to military defeats the way the Arabs states did.”

Hirst, author of the upcoming book Beware of Small States, sees Iran as attempting to fill the role of Nasserite Egypt through its support for groups such as Hezbollah. The strategy reflects the weakness of once-powerful Arab nations and the United States more than it does Iranian strength, he says.

Meanwhile, Iran-backed nonstate actors also face barriers to advancement. “Hezbollah is trying to achieve the kind of dominance in Lebanon that the Maronites had, which boomeranged against them,” Hirst said, adding that ultimately, Hezbollah will have to decide whether its “jihadist” aspirations exceed its desire to be a major Lebanese political force.

For U.S. policymakers, it is critical to see Iran in its true dimensions: more powerful than Saddam Hussein’s Iraq but constrained by internal problems and external resistance. Iran has increased its sphere of influence since 2001, and its allies have scored major military and political victories.

But Iran’s ability to project power is limited by its Persian, Shiite identity and its conventional military weakness. Although its nuclear program is accelerating, it has made slow progress considering that it began, with U.S. help, more than a half century ago.

U.S. policies of rejecting unconditional negotiations with Iran while blaming Iran for much of the violence in the Middle East have bolstered Iran rather than weakened it. Iran and other local actors have sought to compensate for what they perceive as polarizing U.S. actions by attempting to broker deals in Lebanon, between Israel and Syria, and between Israel and Hamas without U.S. involvement.

Ultimately, however, the United States must be brought in — if for no other reason than as a guarantor of Israeli security.

Many analysts remain convinced that Iran, if presented with sufficient incentives — as well as continued pressures — would curtail its malign regional interference.

Such a “grand bargain” would likely require an end to U.S. sanctions against Iran, and Iranian integration into regional security forums and other global institutions.

“At some point, Iranians will be willing to trade the Arabs for the United States,” said Adnan Obu Odeh, a former Jordanian information minister and ambassador to the United Nations. “They want to survive.”

Editor’s Note: This feature is adapted from Barbara Slavin’s report for the United States Institute of Peace, entitled “Mullahs, Money, and Militias: How Iran Exerts Its Influence in the Middle East.” You can read the full text here.